Peloton, the at-home fitness equipment company that’s found itself embroiled in a handful of controversies over the last year-plus — from the recall of thousands of treadmills following the death of a six year-old to widely publicized leadership failures and the withdrawal of an ad starring Chris Noth following sexual assault allegations against the actor — today filed its third-quarter financial results.
The results were bleak: in a letter to shareholders, chief executive officer Barry McCarthy (who took the reins in February following the ousting of John Foley) outlined key takeaways from a quarter riddled by sales declines, an inventory pileup and major cash losses. He noted that the company rounded out the quarter “thinly capitalized” with $879m in unrestricted cash and cash equivalents and signaled that leadership is keenly focused on developing a recovery plan. “Turnarounds are hard work,” he said.
Following the news, shares of Peloton dipped 16% in premarket trading this morning.
What do the results show?
● The company saw a net loss of $757.1m, or $2.25 a share, during the quarter — a dramatic shift from the same period last year, when net losses were $8.6m, or 3 cents a share. The loss is much wider than projections showed; analysts had estimated a share loss of 83 cents.
● Revenue dropped nearly 27% year-over-year (YoY), from $1.26bn to $946.3m. The decline surpassed analysts’ estimates. The company attributed revenue losses to a dramatic drop in demand as consumers return to gyms post-pandemic. The loss was partially offset by a lift in treadmill sales.
● Peloton saw a negative return on equity of 59.67% and a negative net margin of 27.48%.
● During the quarter, the company tallied $594m in sales from its connected equipment and $370m from user subscriptions. At quarter’s end, Peloton had 2.96 million connected fitness subscribers, reflecting a net increase of 195,000.
● The company also lowered its churn rate from the previous quarter — monthly churn of its connected fitness subscribers was 0.75%, down from 0.79% in Q2. This is good news for Peloton as it focuses increasingly on growth via subscriptions. “The challenge and the opportunity today is to sustain and extend this success,” wrote McCarthy in his letter, referring to subscriber retention.
● Overall, the company’s stock is down 80% over six months. When the market closed Monday, Peloton stock was at $14.13 per share, down nearly 69% from its IPO price of $29 in September of 2019.
What’s Peloton's recovery plan?
● With just $879m in unrestricted cash and cash equivalents, the company is rethinking its capital structure, per McCarthy’s letter to investors.
● Part of the company’s recovery plan was made clear earlier this week, when Peloton inked a deal with Goldman Sachs and JPMorgan — both of whom backed the company’s 2019 IPO — to borrow $750m in a five-year term debt. With the loan, McCarthy predicted that the company’s free cash flow would be “meaningfully better” by Q4 and suggested that Peloton would be able to go cash flow positive by the 2023 fiscal year.
● Leadership sketched out a poor sales outlook for the coming quarter, citing “softer demand” compared to the company’s February forecast, which McCarthy said in his letter to investors was “partially offset by accelerated sales we've seen as a result of our recent hardware price reductions.”
● The fitness equipment maker also suggests that it could lose many users in the next quarter due to planned increases in its subscription prices. However, company leadership appears to see subscription revenues as a core component of its financial strategy. Even so, Peloton expects its fitness subscriber count to grow just 1% in the coming quarter.
● Peloton plans to focus more on marketing its digital app in the coming months. It’s seen success in recent months; digital app subscriptions were up 10% YoY. But McCarthy said he sees a major opportunity – to use the app as a tool for growth. As it stands, the unaided brand awareness for the digital app in the US hovers around 4%, which the exec acknowledges is “quite low.” He says it’s time to make the app the centerpiece of the brand’s marketing strategy. “We’re still known primarily as a stationary bike company. The app has never been a focal point of our marketing campaigns or growth strategy. The digital app needs to become the tip of the spear.”
● From a more general standpoint, the company is reimagining its marketing priorities. It’s shifting its focus from subscriber acquisition cost (CAC) to new profit metrics based on long-term value-add. “Looking ahead, as we play for scale, we’re changing our focus to customer lifetime value (LTV), which is the net present value of the gross profit per subscriber over the expected life of the subscriber,” said McCarthy is his letter. “We’re doing this because we maximize profit when marginal cost equals marginal revenue, or in our case when marginal CAC equals our marginal LTV.” He admits that while high customer acquisition costs can equate to immediate losses, new subscribers drive enterprise value through LTV in the long run. He points to Netflix and Spotify (both former employers of his) as good examples of the promise of the LTV-focused marketing strategy.
● As part of its growth plans, McCarthy also said that Peloton plans to begin selling its gear via third-party retailers in the near future, a departure from its existing model.
● To remedy an excess inventory problem that it saw in Q3, McCarthy said the business is working quickly to adjust production levels appropriately.
● Broadly speaking, it's clear that Peloton is experimenting with payment models in an attempt to win over more users and drive profitability. Aside from a renewed focus on subscriptions over equipment sales, the company is trying out new tactics. McCarthy said in his letter that the company plans to expand a test it ran earlier this spring that enables customers to pay one bundled, flat-rate fee for a stationary bike plus a fitness membership. To reach its overarching goal of reaching 100 million subscribers, the company also hopes to expand into additional international markets, though the timeline for that growth is unclear. McCarthy admitted in his letter that the goal is “a long, long way from where we sit today.”